Planning for the worst

A news item about the possibility of Mars colliding with the Earth caught my eye yesterday. Of course it’s not likely to happen for billions of years, but it’s a sobering thought that the entire planet might one day be obliterated. Is it something we should start planning for now? Several years ago, I met a lady at NASA research in California who, amongst other things, was exploring fallback options for a future loss of the moon. Interestingly and surprisingly the presence of the moon is absolutely vital to support life on Earth, though one day its orbit will fail.  

Such thoughts beg the question “What’s the worst thing we should plan for?” Former trader and author Nassim Nicholas Taleb uses the metaphor of a “black swan” to describe the impact of rare, unpredictable events that take us by surprise. Such events cannot be accommodated in traditional models of prediction. He argues that we place too much weight on the flawed assumption that past events will repeat. We should devote at least a small amount of our time and money on planning for highly unlikely outcomes.

Unfortunately, we don’t have many methods for examining the consequences of extreme events. Scenario planning is one option. Shell, for example, has for many years conducted long-term scenario planning to ensure their business managers are prepared for alternative futures. There’s a danger of course that such thinking could make them too risk averse. But this is a company that thinks long-term. I recall they even used to take steps to ensure they could continue business following a nuclear war.

Goldman Sachs used to plan for a “worst of the worst” or WOW scenario in which twenty different asset classes might fall to the lowest recorded level in recent years all on the same day. But, amazingly, that turned out to be nowhere near as bad as the recent financial meltdown. In fact, such exercises are neither realistic nor foolproof. But in practice they are useful for helping to prepare business managers for unexpected shocks.

Business continuity planning is a more practical tool for preparing for the worst. But how extreme should the options be? In practice, such plans address the more familiar forms of disaster. And most experienced managers prefer to operate on the basis of “no double jeopardy”, i.e. it’s unlikely that two improbable events will occur at the same time. Unfortunately, however, that can happen under certain conditions of networks and markets, though, to be fair, in those cases, it’s generally triggered by a single, higher-level event.

Crisis exercises are a much better vehicle for “thinking the unthinkable”. Like scenario planning, the use of an imaginary storyline encourages managers to suspend disbelief and go along with the plot. This results in a self-discovery of learning points that could not be conveyed through logical argument. Business managers generally become defensive if you try to present a case for addressing an unlikely event. It’s better that they come to that conclusion themselves.  

This century we’ve already experienced major terrorist incidents, wars and market crashes. Pandemics and cyber wars are waiting to hit us in the near future. As networks connect more and more people, data and objects, they create new opportunities for high-impact events. For that reason we should all be aiming to raise our game in preparing for the unexpected.